Procter & Gamble of Great Britain

October 31, 2022

Here at Smart Money Monday, we’re go-anywhere investors. I’m definitely biased towards US stocks – after all, I’m based in North Carolina and most familiar with US reporting standards. However, that doesn’t stop me from looking for unique opportunities around the world. In fact, my hunt for value led me to the UK, where the shares are on sale.

To properly understand how UK stocks are performing, you need to look at the MSCI United Kingdom index.

This market capitalization weighted index of 82 UK listed companies covers 85% of the UK stock market. You can play it in the US through the iShares MSCI United Kingdom ETF (EWU).

EWU is down 22% YTD. This is broadly in line with the S&P 500 (SPY), which is down 25% since the beginning of the year.

However, scaling back over the past five years, EWU is down more than 10%. Compare that to the S&P 500, which is up 40% over the same period:

Click to enlarge

In short, five years of poor performance have reduced UK valuations to near-record levels…

The cheapest in the last 2 decades

The UK stock market trades at just nine times earnings, according to Yardeni Research. This estimate corresponds to the levels of 2008 and 2011, both periods of crisis. In 2008, it was the global financial crisis. And in 2011, the European debt crisis.

It’s cheap.

Compared to other advanced economies, the UK is the cheapest on a relative basis. The MSCI US index trades at 16.5 times forward earnings. Japan: 12.1 times earnings. And the European Union: salaries in 10.7 times.

Click to enlarge

Source: Yardeni’s research

But as you may know, I usually don’t recommend buying an index. I like having separate names.

Here’s one I’m following…

British P&G

One of the largest companies in the UK, parts of which have been around for over 200 years, is Reckitt Benckiser Group plc (RBGLY). I like to think of it as Procter & Gamble (PG) of Great Britain

RBGLY manufactures and sells health, hygiene and home products. It owns many household brands you’re probably familiar with, such as Lysol detergents, Clearasil skin care products, and Enfamil infant formula.

Based on analyst expectations for 2023, PG currently trades at 21 times forward earnings. RBGLY, on the other hand, is trading at just 16 times 2023 earnings estimates.

That’s a pretty big difference.

In 2017, RBGLY completed its transformational $16.6 billion acquisition of infant formula company Mead Johnson. He borrowed to complete the deal, which left some investors unhappy.

But then it was Reckitt. Reckitt is on a much better footing today…

First, it has paid off debt and is moving toward profitable growth. Also, Reckitt doesn’t just work with the UK. Its revenues are evenly distributed between North America, Europe and emerging markets. It is a far-reaching company with a globally diversified business model.

Still, I’m not quite ready to pull the Reckitt trigger. There was a surprise CEO change recently when former CEO Laxman Narasimhan left the company to lead Starbucks (one of my Smart Money Monday recommendations).

So until Reckitt has some clarity on the company’s future leadership, I’m waiting on the sidelines. But it remains one of my favorite UK tracking ideas. It’s on my watch list, so keep an eye out for potential action.

Stock price data is provided by IEX Cloud with a 15-minute delay. Chart price data is provided by TradingView with a 15-minute delay.